I always say that people do not trade the markets; they trade their beliefs about the markets. Consequently, I'd like to point out that these updates reflect my beliefs. I find the market update information useful for my trading, so I do the work each month and am happy to share that information with my readers.

If, however, your beliefs are not similar to mine, then this information may not be useful to you. If you are inclined to perform some sort of intellectual exercise to prove one of my beliefs wrong, simply remember that everyone can usually find lots of evidence to support their beliefs and refute others. Know that I acknowledge that these are my beliefs and that your beliefs may be different.

These updates are in the first issue of Tharp's Thoughts each month. This allows us to get the closing month's data. These updates cover 1) the market type (first mentioned in the April 30, 2008 edition of Tharp's Thoughts and readable on our web site), 2) the five-week status on each of the major U.S. stock market indices, 3) our four star inflation-deflation model plus John Williams' statistics, and 4) the movement of the dollar. I now report on the strongest and weakest areas of the overall market in a separate SQN® Report. I may come out with that report twice a month if there are significant market changes.—Van K. Tharp

Part I: Commentary—The Big Picture

I recently sent out a warning about the market decline. Then last month, I said the decline was over. And of course, this month, the market has moved from bull to neutral. The market activity is quiet so it might just stay sideways for a while.

Later this year, I’m expecting a rise in interest rates. What’s interesting is that when the market goes down; people start to move into bonds, which, moves interest rates down. It also puts the new buyers in a very dangerous situation. The Federal Reserve has already stated that they’d stop their massive infusion of money into the market (which they do by purchasing as much as $85 billion in debt each month).

Today, our official debt is nearly $17 trillion and is going up a trillion dollars every year. Our unofficial debt is over $100 trillion. Under Reagan’s administration, we moved from being the largest creditor nation to the largest debtor nation in the history of the world. Today, we are still the largest debtor nation in the history of the world—only more so. Furthermore, the debt situation is so bad that the Federal Reserve had to drive short-term interest rates to almost zero and long-term rates to very low numbers. This is killing the U.S. dollar and interest rates have nowhere to go but up. In fact, betting on eventual higher interest rates is about as close to a certain bet (long-term) as you could ever make, however, such a bet might be similar to shorting dot.com stocks in 1999. You’ll experience a lot of pain before you reap your windfall.

According to the U.S. debt clock, our national debt stands at $16.92 trillion. That’s up $30 billion from last month. The US population remains at 316 million with taxpayers standing at 114.2 million. The Boomer retirement wave is in its earliest stages, as retirees now stand at 47.29 million. Disabled people collecting social security stands at 14.42 million, while food stamp recipients total 47.92 million (with all three being up over the past month); so that’s 109.9 million people that are supported either by the government or the 114.2 million taxpayers. But in reality, only about 11 million taxpayers pay 90% of U.S. taxes. This means that 11.4 million workers are supporting 109.9 million other people through the government. Do these numbers add up to you? Do they seem sustainable?

Here’s the update for some figures from the debt clock website so you can watch the changes over time. Some of the figures vary from month-to-month and may not make total sense—those variations, however, tend to be relatively small. Notice that the total debt burden per family has increased by over $100,000 in the last year - that’s all government spending.

Part II: The Current Stock Market Type Is Neutral Quiet

Each month, I look at the market SQN® score for the daily percent changes in the S&P 500 Index over 200, 100, 50 and 25 days. For our purposes, the S&P 500 Index defines the market. The SQN 200 remains at strong bull, the SQN 100 and SQN 50 are both neutral, and the SQN 25 is strong bear, which says that short-term, the market is very weak. The only thing keeping the market from looking very dangerous is the quiet volatility.

The first chart is a weekly bar chart of the S&P 500 and you can see that in general, the market went down in August.

The next table shows the activity of the three major U.S. indices at the closing Friday of each week.

Last month, all three indices showed gains of 20% or more for the year. Now, all three gains are below 20%. As I said last month, 20% is usually a good year in itself. However, what is the impact of the Fed buying $85 billion in debt each month going to be on the dollar? My guess is that we need a lot more than 20% gains to make up for that.

Part III: Our Four Star Inflation-Deflation Model

In the simplest terms, inflation means that stuff gets more expensive, and deflation means that stuff gets cheaper. There’s a correlation between the inflation rate and market levels, so the inflation rate can help traders understand big-picture processes. However, the CRB:CCI index was discontinued on April 17th. As a result, I switched to the ETF called DBC to look at commodity prices. I’ve kept the prior years’ CCI data (from 2005 to 2012) as a reference since the DBC data does not go back that far.

Date

DBC

XLB

Gold

XLF

Total Score

Dec ‘05

347.89

30.28

513

31.67

Dec ‘06

394.89

34.84

635.5

36.74

Dec ‘07

476.08

41.7

833.3

28.9

Dec ‘08

352.06

22.74

865

12.52

Dec ‘09

484.42

32.99

1,104.00

14.1

Dec ‘10

629.53

38.47

1,410.25

16

Dec ‘11

564.37

33.5

1,574.59

13

Dec ‘12
DBC

556.08
27.79

37.54

1,664.00

16.39

Jul ‘12

27.25

34.84

1,622

14.66

-1

Aug ‘12

28.79

35.65

1,648.5

15.16

-2.5

Sep ‘12

28.68

36.8

1,776

15.59

2

Oct ‘12

27.56

36.03

1,719

15.9

0

Nov ‘12

28.10

36.7

1,726.5

15.76

1

Dec ‘12

27.78

37.54

1,664

16.39

1

Jan ‘13

28.47

39.5

1,664.75

17.38

1

Feb ‘13

27.13

38.56

1,576.9

17.64

-2

Mar ‘13

27.31

39.18

1,598.25

18.21

-2.5

Apr ‘13

26.27

39.55

1,469.00

18.70

0

May ‘13

25.86

40.30

1,394.00

19.84

-2

Jun ‘13

25.13

38.35

1,192.00

19.45

-2

Jul ‘13

25.93

40.48

1,333.50

20.49

-1.5

Aug ‘13

26.66

40.43

1,394.75

19.44

-0.5

Looking back over the most recent two-month and six-month periods provides the current month’s score, given in the table below.

Month

CRB2

CRB6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

Higher

Lower

Higher

Higher

Higher

Lower

Lower

Higher

Aug-13

-1/2

+1

-1/2

-1/2

-1/2

This data still suggests deflationary pressure. Only one month in 2013 has been inflationary. Again, I elected to look at the shadowstats.com data on inflation. Based upon the way the CPI was calculated in 1980, they show inflation at about 9.5% compared with the government figures which are at about 2%.

In spite of the Fed’s near doubling of the M1 money supply since 2008, their efforts to stoke inflation have had limited success. Since about 2008, banks have been less willing to lend, while business and consumers have been less willing to borrow money. This shift towards a more conservative stance on debt appears in the chart below of the money multiplier effect. A money multiplier below 1 is deflationary, as banks are not lending as much as they have and nowhere near the levels they were lending at before 2008. As of the last published data, the money multiplier was still well below 1.0 and was going down, not up. The following chart shows that the trend is clearly down, which is why we are seeing the deflationary trends.

Part IV: Tracking the Dollar

In May, the dollar had a pretty strong surge, moving above 84. However, it has been getting weaker since that time, going down as low as 81. Right now it is at 81.9. The Forex market is a great market to trade right now with huge volatility and lots of opportunity for profit. I’m heading to Europe, so it’s probably time for the Euro to go up versus the dollar.

General Comments

With the fundamental conditions we have in place, the market is a real crap shoot unless you trade short-term with lots of low risk ideas. We signaled a bear market and then the market moved back to bull territory very quickly and in another month it has moved back to neutral. That kind of movement is very hard for doing well with long-term investing.

At some point in time, the Fed has to end their buying program, interest rates will start to skyrocket, and the market will crash. But who knows when that will happen? Don’t bank on any long-term trends continuing.

Until next month, this is Van Tharp.

These monthly market updates are not intended for predictive purposes; rather, they’re intended to help traders decide which of their trading systems should work best in the current market conditions. In bear markets—which are almost always volatile by nature—shorter-term strategies, and those that allow going short, tend to work better than long-only or intermediate/longer-term systems.

Which of your trading systems fit this current market type? Of course, this question implies that you have multiple trading systems and that you know how they perform under various market conditions. If you haven't heard of this concept or the other concepts mentioned above, read my book, Super Trader, which covers these areas and more, so that you can make money in any kind of market condition.

Crisis always implies opportunity. Those with good trading skills can make money in this market—a lot of money. There were lots of good opportunities in 2012, and many more to come in 2013. Did you make money? If not, then do you understand why not? The refinement of good trading skills doesn't just happen by opening an account and adding money. You probably spent years learning how to perform your current job at a high skill level. Do you expect to perform at the same high level in your trading without similar preparation? Financial market trading is an arena filled with world-class competition. Additionally, and most importantly, trading requires massive self-work to produce consistent, large profits under multiple market conditions. Prepare yourself to succeed with a deep desire, strong commitment and the right training.

About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com. His newest book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.

PLEASE NOTE: Dates below are not firm. Don't make any flight plans. Since they are new or modified workshops, we don't have information yet to link to. But this will help you see what's coming so you can start thinking of how it fits into your schedule.

November 8-10

Swing Trading with Ken Long

Including new modifications and add-on 'turbo' training in the evenings, 6pm-9pm.

November 11-13

Live Turbo Trading with Ken Long

New!

To see the full schedule, including dates, prices, combo discounts and location, click here.

Ken's Class

2.8R Trade Opportunity at the End of the Day in YM

Good preparation creates its own luck; in this example preparation met opportunity for a favorable reward:risk opportunity near the end of the day.

There are numerous ETFs that I track including countries, commodities, currencies and stock market indices to individual market sectors. ETFs provide a wonderfully easy way to discover what’s happening in the world markets. I use the System Quality Number® (SQN®) score for 100 days to measure the relative performance of numerous markets in a world model.

The SQN 100 score uses the daily percent change for a 100-day period. Typically, an SQN score over 1.45 is strongly bullish and a score below -0.7 is very weak. We use the following color codes to help communicate the strengths and weaknesses of the ETFs:

Green: ETFs with very strong SQN scores (0.75 to 1.5).

Yellow: ETFs with slightly positive SQN scores (0 to 0.75).

Brown: ETFs with slightly negative SQN scores (0 to -0.7).

Red: Very weak ETFs that earn negative SQN scores (< -0.7).

The world market model spreadsheet report below contains most currently available ETFs; including inverse funds, but excluding leveraged funds. In short, it covers the geographic world, the major asset classes, the equity market segments, the industrial sectors and the major currencies.

World Market Summary

In some months, just looking at the first part of the report will tell you the whole story. Most of the world is neutral or worse. The US, which was light green last month, is now neutral, as is Europe. The rest of the world, with the exception of China and the Netherlands, is bearish.

Even in the Americas, everything with the exception of the US is weak. Brazil, Chile, Mexico and Latin America are all red, while Canada is brown.

Last month, there was some real strength in US sectors, but now, most of that has disappeared. Pharmaceuticals, Aerospace and Defense, Biotech and Genome are still dark green, but the scores are now below 2.0. All other dark greens from last month have turned light green. The light green sectors include biotech, consumer discretionary, brokers, food and beverage, retail, insurance, media, regional banks and software.

On the negative side, REITs are now red, while consumer staples, homebuilders, metals and mining and utilities are brown. Volatility is also brown; however, that’s an improvement from last month when it was red.

Currencies still are all particularly weak, with only the Chinese Yuan being light green. The US Dollar, the Euro and the Krona are brown. While the Australian dollar (below -2.0), the Brazilian Real, the Canadian Dollar and the Indian Rupee are all red. Since we’ll be going to Australia again during their summer in about six months, perhaps the Aussie dollar is a good long-term buy (that’s a joke, not a recommendation).

The next chart shows real estate, debt instruments, commodities and the top and bottom ETFs for the past 100 days.

Last month, there were eight areas in which the SQN 100 was above 2.0. The only remaining one is the Aussie dollar. Now, there are eight areas in which the SQN 100 is minus 1.75 or worse. These include global currencies, the Real, inflation protected bonds, Chile and several Municipal Bond ETFs. Can you remember when inflation protected bonds and municipal bonds were the safe place to put your money? Every other type of bond, except for short term, is red.

Commodities are also generally weak with only oil and livestock being light green. Gold, silver, base metals, steel, commodities, global water, timber and agriculture are brown. Global agribusiness, coal and natural gas are red. The only two agriculture and global agribusiness are all red.

And lastly, all of the real estate sectors have gone from brown to red, with the exception of Chinese real estate which is still brown.

Summary

I’ve decided to keep a new table to indicate the percentage of ETFs on our list that are in each category. This will be kept up monthly (at least). You’ll notice that this month, we begin with only 16% of all ETFs being bullish, whereas 36.8% are bearish.

Date

Very Bullish

Bullish

Neutral

Bearish

Very Bearish

> 1.5

0.75 - 1.5

0 - 0.75

0 - -0.7

< - 0.7

January 31st

27.1%

39.6%

20.7%

6.4%

4.7%

February 28th

10.3%

45.2%

24.4%

11.9%

7.5%

March 31st

39.2%

25.5%

19.1%

9.0%

6.4%

April 30th

49.1%

21.1%

14.8%

8.0%

6.2%

May 31st

29,2%

23.6%

19.9%

12.3%

14.2%

June 30th

2.1%

31.0%

23.2%

22.0%

20.9%

July 31st

8.2%

33.5%

29.0%

13.3%

15.2%

August 30th

1%

15%

46.4%

19.3%

17.5%

I discovered that my spreadsheet would give me this data for each month this year. Noting that the ETFs are clearly biased toward what is happening in the US, because so many of them are US-based, you’ll notice how, in January through May, more than 50% of the ETFs were bullish. That dropped to 33.1% in June, 41.7% in July, and then to its low of 16% in August. Do you see a trend?

What's Going On?

As of July, you could have been up as much as 20% by being invested in the US equity markets. In August, you gave up some of those gains. And who knows if the Fed will continue to buy $85 billion worth of bonds monthly throughout the year.

Remember that pension money has now stopped flowing into the market for this year. So overall, except for the Fed, there should be a net outflow because of the number of retirees who now need their investments to live on.

Until next month’s SQN report, this is Van Tharp.

The markets always offer opportunities, but to capture those opportunities, you MUST know what you are doing. If you want to trade these markets, you need to approach them as a trader, not a long-term investor. We’d like to help you learn how to trade professionally, trying to navigate these markets without an education is hazardous to your wealth.

All the beliefs given in this update are my own. Though I find them useful, you may not. You can only trade your beliefs about the markets.

Matrix Insights

Don't forget to submit your insight for the Matrix contest for a chance to win a free workshop!

We want to hear about the one most profound insight that you got from reading Van's new book, Trading Beyond the Matrix, and how it has impacted your life. If you would like to enter, send an email with your insight to van@vantharp.com. If we publish your insight you'll also get a $20 VTI gift certificate for VTI products.

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